SUDAN’S OIL INDUSTRY

ON THE EVE OF THE REFERENDUM

FACTS AND ANALYSIS IV

SUDAN’S OIL INDUSTRY

ON THE EVE OF THE REFERENDUM

FACTS AND ANALYSIS IV

DECEMBER 2010 4

COLOPHON

This ECOS publication is supported by the Open Society Initiative for Eastern Africa (OSIEA)

Earlier Facts & Analysis reports published by ECOS: • Documentation on the Impact of Oil in Sudan, Fact Sheet I, May 2002 • The Economy of Sudan’s Oil Industry, Fact Sheet II, October 2007 • Sudan: Whose Oil? - Sudan’s Oil Industry: Facts and Analysis III, April 2008.

ISBN EAN 9789070443207

December 2010

This report is the copyright of ECOS, and may be reproduced in any form without the written permission of ECOS, provided the integrity of the text remains intact and is attributed to ECOS.

Contact: European Coalition on Oil in Sudan P.O. Box 19316 3501 DH Utrecht The Netherlands [email protected] www.ecosonline.org

The European Coalition on Oil in Sudan (ECOS) is a large group of European organizations working for peace and justice in Sudan. ECOS calls for action by Governments and the business sector to ensure that Sudan’s oil wealth contributes to peace and equitable development.

Disclaimer ECOS can express views and opinions that fall within its mandate, but without seeking the formal consent of its membership. The contents of this report can therefore not be fully attributed to each individual member of ECOS.

Cover Photo : Oil facilities in Gak Bany, Upper Nile State (2010). Fotocredit: ECOS Archive ECOS 5 Contents

Acronyms and abbreviations ...... 6

RECOMMENDATIONS ...... 7

1. The Purpose of this Report ...... 8

2. Sudan’s Peace Process: Where We Stand ...... 8

3. Sudan’s Oil Potential ...... 10

3.1 Oil Reserves ...... 10

3.2 Exploration ...... 10

4. Infrastructure ...... 13

4.1 Refineries ...... 13

4.2 Pipelines ...... 14

5. Oil Consortia & Production Volumes ...... 15

5.1 In the Driver’s Seat: Asian National Oil Companies ...... 15

5.2 GNPOC (Blocks 1, 2 & 4): Nile Blend ...... 15

5.3 Petrodar/PDOC (Blocks 3 & 7): Dar Blend ...... 15

5.4 WNPOC-1 (Block 5A): Nile Blend ...... 16

5.5 Petro Energy (Block 6): Fula Blend ...... 17

5.6 Total-led Consortium (Block B) ...... 17

6. Production Trends ...... 18

7. Management and Revenues ...... 20

7.1 Institutional Set-up ...... 20

7.2 Production costs ...... 20

7.3 Profitability ...... 21

7.4 Revenue Sharing ...... 21

7.5 Value of Oil Exports ...... 23

7.6 Macro-economic impact ...... 23

8. Investment & Outlook ...... 24

8.1 Volatile Business Environment ...... 24

8.2 International divestment ...... 26

9. Key Issues & Recommendations ...... 26

9.1 Accountability ...... 26

9.2 Accountable governance ...... 27

9.3 Environmental Standards ...... 27

9.4 Legacy Issues ...... 27

9.5 Social Support Basis ...... 27

9.6 Post-referendum challenges ...... 28

Annex I: Chronology of oil development ...... 30 6 Acronyms and abbreviations

APCO Advanced Petroleum Company

CNPC Chinese National Petroleum Corporation

CPA Comprehensive Peace Agreement

EIA (US) Energy Information Administration

EIU Economist Intelligence Unit

GNOP Greater Nile Oil Pipeline

GNPOC Greater Nile Petroleum Operating Company

GoNU Government of National Unity

GOSS Government of Southern Sudan

IHS Information Handling Services

IMF International Monetary Fund

INC Interim National Constitution

MEM Ministry of Energy and Mining

NCP National Congress Party

NISS National Intelligence Services

NOC National Oil Company

NPC National Petroleum Commission

ONGC Oil and National Gas Corporation; national oil company of India

PDOC Petrodar Operating Company

RSPOC Red Sea Petroleum Operating Company

SPLM Sudan People’s Liberation Movement

WNPOC White Nile Petroleum Operating Company ECOS 7 Recommendations

The post-referendum negotiations on oil arrange ments open up the opportunity to make the country’s natural resources benefit the people. To accomplish this, ECOS recommends that:

1. The Sudanese authorities immediately require all oil companies to respect international stan dards and best industry practices on com munity relations, human rights, labour rights, transparency, and environmental protection. Both the Comprehensive Peace Agreement (CPA) and the Interim National Constitution (INC) require the oil industry to apply ‘best known’ practices in the oil industry, but neither the National Congress Party (NCP ) nor the Sudan People’s Liberation Movement (SPLM ) have specified what those are. The explicit expectation to respect specific standards and practices could be an effective short cut to raise the industry’s performance and building its social support basis in anticipation of an adequate legal and regulatory framework.

2. GOSS takes the initiative to realise the right of victims of the oil wars to be compensated for their losses. The CPA establishes a right to compensation but this clause has not been adequately implemented. Set in a framework of reconciliation, compensation would create des perately needed peace dividends and con tribute to stability in crucial border regions .

3. Companies thoroughly restructure their com munity engagement. The petroleum industry is lacking a satisfactory social support basis and consequently suffers from sabotage and stop pages, adding to its already high-risk profile and discouraging investment. The prominent role that the CPA reserves for community con- sultations has remained largely ignored. A lack of a social support basis is a deterrent for international investors and severely restricts opportunities for growth.

4. A post-2011 deal on the oil industry must be an integral and broad negotiation package. The alternative, many separate agreements, will be time-consuming, incoherent, and eventually disappointing for at least one of the parties. A comprehensive, straightforward and legally sound deal for managing the oil industry must be agreed upon, whatever the outcome of the January referendum.

5. For successful post-referendum negotiations, NCP and SPLM negotiators all get unlimited access to a full package of information. This will require establishing a data room, including oil production, calculation parameters, marketing, export and refining, as well as all relevant data on ownership, contractual rights and obligations, money flows, financial arrangements, et cetera. If not realized shortly, post-referendum negotiations will take place on an unequal footing which is tantamount to guaranteeing that their outcome will be disputed. An agreement that is indecisive or incomplete will lead to future disagreement and gruelling renegotiations.1

6. A fee-for-service deal about the use of oil infrastructure as part of a comprehensive financial scheme could create the necessary body of common interest between NCP and SPLM to ensure peace. Continuation of the oil flows is a shared priority, but continuation of the existing revenue sharing formula is not politically feasible. Ownership of infrastructure is irrelevant if there are export guarantees, joint oversight , and sound financial arrangements.

7. Accelerated recruitment and training for GOSS officials is paramount. Should secession be come a reality, the GOSS will instantly inherit a multi-billion dollar industry and all the rights and duties this entail, without having the necessary human resources, institutions, experience and legal capacity to monitor operations, enforce the law and protect its own rights and interests and that of its population.

8. Implementation of the Voluntary Principles on Security and Human Rights and de mili tari sation of the oil areas would create the level of security and stability that the industry needs. Current security arrangements for the oil industry are not sustainable . In preparation for the post-referendum era, both SAF and SPLA may reinforce their military capacity in the border areas and the oil fields. In any scenario, the industry will need peace in the border areas and guaran tees that its assets and staff will be safe. A post-2011 oil deal will have to include these guarantees. Where they exist, weeding out security agents from oil companies’ payrolls, demilitarisation of the oil areas , and mandatory compliance with the Voluntary Principles on Security and Human Rights would be the cheapest and most effective way to ensure the industry’s security.

1. “Post-Referendum Arrangements for Sudan’s oil Industry, or: How to Separate Siamese Twins”, ECOS, December 2010. 8 Chapter 1/2

1. The Purpose of this Report

With the elections of April 2010, Sudan passed a an extremely complex and sensitive operation. Oil major milestone of the 2005 Comprehensive Peace has also been a driver of past conflict. 2 However, the Agreement (CPA). Despite major flaws in the electoral significant wealth that oil generates is equally process, the results have been widely recognized by important to both parties and if they agree on a the outside world. The NCP and SPLM remain firmly mutually satisfactory formula, oil could be the in power in the North and the South respectively. foundation for a peaceful future. The time is now ripe to seize the opportunity to make the country’s natural The next and even greater challenge ahead lies in the resources benefit the people. referenda in Southern Sudan and Abyei, scheduled for January 2011. With popular sentiment in the This report presents an overview of facts and trends South decidedly in favour of secession, the NCP and in Sudan’s petroleum industry and highlights key SPLM are preparing for a possible break-up of the challenges for the coming period. The aim is to make country. On 6 July, negotiations for post-referendum vital information about the industry publicly available, arrangements started in Khartoum. Finance will play and to contribute towards a constructive dialogue a key role in these negotiations. Sudan’s substantial between the country’s national and international oil industry is the dominant money-maker for the stakeholders. country’s two governments and to split it up will be

2. Sudan’s Peace Process: 2. Where We Stand

Oil dominates the CPA’s Wealth Sharing Protocol. what practices were meant or how they would be Both parties agreed to painful compromises: the enforced. The GONU is primarily to blame for the NCP lost its exclusive military control over the oil absence of adequate standards and enforcement, fields, and the SPLM accepted that the Government while the Government of Southern Sudan (GOSS) of National Unity (GONU) received 50% of revenues has remained curiously passive in advancing its from oil produced in the South. In addition, under a interests. clause that safeguards existing oil contracts from renegotiation, the SPLM accepted that the industry The industry’s social support basis is dangerously would continue to function in the manner it had small. The failure to develop healthy relations with the developed during wartime and remain under NCP population is illustrated by a GNPOC (Greater Nile control. The National Petroleum Commission (NPC), Petroleum Operating Company) report from 2008 intended to be the forum for shared decision making that calculates the immediate cost of vandalism, theft between SPLM and NCP, has never functioned and related stoppages during the first half of 2008 at effectively. The CPA clauses for community con - US$ 10.7 million. sultation and other best practices have not been respected. The NCP has dominated the Ministry of Against all odds, the CPA has proved to be a Energy and Mining (MEM), in which the SPLM State safeguard for the country’s fragile peace. At first Minister was denied all substantial executive powers. sight, the picture looks discouraging. Its signatories With Dr. Lual Deng in charge of the Ministry of Energy only represent a fraction of Sudan’s vast population, and Mining since June 2010, the SPLM might have and many of its provisions have largely gone obtained a say in the oil industry’s future, albeit unimplemented. In particular, when it comes to the belatedly. more technical agreements on security, wealth sharing or the political deals for the three areas Many of the CPA’s oil provisions have been ignored. (Abyei, Blue Nile and Southern Kordofan), the peace The CPA is obliging the industry to follow “best deal has proved elusive on many counts. Political known practices in the sustainable utilization and representatives from the SPLM in the Government of control of natural resources”, but did not specify National Unity have been systematically sidelined,

2. Human Rights Watch, Sudan, Oil and Human Rights, Washington DC: Human Rights Watch/ Africa, 2003; Oral statement by Gerhart Baum, Special Rapporteur on Human Rights in Sudan to UNCHR, March 2001; Harker, John, Human Security in Sudan: The Report of a Canadian Assessment Mission, Ottawa, January 2000, prepared for the Canadian government; ECOS, Unpaid Debt, Utrecht, June 2010. ECOS 9

joint decision-making was often non-existent, and position in Southern Sudan is relatively robust, and the regulatory process on issues such as elections, since the signatories share an interest in not border demarcation and the census had contested compromising oil revenues, the oil companies have outcomes. 3 Nevertheless, key provisions such as been able to continue their operations and post wealth and power sharing have been respected, massive profits. The challenge is to sustain oil albeit imperfectly. With the referendum on Southern production and create a conducive post-in vest - independence looming on the horizon, the CPA is ment environment to offset a decline in pro - facing its last, and arguably most difficult, test. duction. The pervasive secretiveness in the industry Sudan’s petroleum industry has emerged from the and its poor social support basis in the South are peace process as a winner. Since the security major obstacles to achieving this.

Nile Blend vs. Dar Blend 2006, the Dar Blend price per barrel ranged from Sudan has two sorts of crude, which are different in $40 to $1.76. Prices then rose in the 2007 and 2008 quality and price. Sudan’s Nile Blend crude is sold boom years, and in the first two quarters of 2009, at higher prices than Dar Blend crude. Nile Blend is Dar Blend sales fetched an average of $32.4. 4 In produced in four different Blocks straddling the fact, Dar Blend production – in terms of output and north-south border in central Sudan, while Dar revenue – has compensated for the recent decline Blend is found in the Melut Basin east of the White in Nile Blend production, and has averted a decline Nile. Due to its poor quality, prices for Dar Blend can in Sudan’s overall oil revenue. The reason for this is be significantly lower than for Nile Blend. Dar Blend because more refineries in Asia have started to is heavy paraffinic and has to be transported at 45- process Dar Blend, and, according to analysts, it 50°C to prevent it from congealing in ship’s tanks. may have been an additional consideration, in This penalizes potential customers, who are in fact addition to soaring construction costs, for Petronas’ scarce, partly as a result of the US embargo. In to reconsider its plans to construct a Dar Blend addition, it is a high acid crude that will erode refinery in Port Sudan. 5 ordinary refinery metallurgy. Refining this oil involves upgrading refinery equipment. Dar Blend also has a In an adverse development, on 8 July 2010 Pe - high arsenic content. This is a pollutant for refinery trochina scrapped plans to process Sudanese catalysts, rendering it unacceptable for many crude at its new refinery in Guangxi Zhuang, South customers. The fuel content of Dar Blend is high, so China, under pressure from the US. The US has some customers blend it with other com ponents in imposed several layers of economic boycotts that order to sell the blend as fuel oil. These serve as powerful deterrents to US-rated com - disadvantages mean that trading prices for Dar panies entering the Sudanese market, hampering Blend fluctuate, and are difficult to predict. Up to development of the industry.

Figure 1: Nile and Dar Blend Production. Source: Economist Intelligence Unit (EIU) June 2010

3. International Crisis Group “Sudan: Preventing Implosion”, Africa Briefing 68, December 2009; “Sudan’s Comprehensive Peace Agreement: Beyond the Crisis”, Africa Briefing 50, March 2008; “Sudan: Breaking the Abyei Deadlock”, Africa Briefing 47, October 2007. 4. Ministry of Finance and Economic Planning, GOSS Petroleum Unit Khartoum. 5. Reuters, “Costs delay Sudan refinery project eyed by Petronas”, May 27, 2008; Reuters, “Sudan to discuss refinery plans with Petronas – oilmin”, January 12, 2009; Interview with industry insider, Khartoum, March 2010. 10 Chapter 3

3. Sudan’s Oil Potential

Estimates differ in terms of where Sudan might be extension of an oil-bearing structure in Libya that is heading as an oil producer. The country continues to not now expected to contain important reserves. be under-explored and its potential reserves are SUDAPAK 1 has, to date, failed to discover oil in poorly documented. Accurate estimates, if they exist, Blocks 9 and 11. WNPOC-3 in Block 8 has not are not publicly available. A key post-referendum surpassed Chevron’s 1982 small find in Dindir 1. challenge will be to maximize exploration and ensure WNPOC-2 relinquished Block 5B after having drilled the implementation of the best available technologies 3 dry wells, confirming some geologists’ suspicions to maximize recovery rates. that the further south one goes, the smaller hydrocarbon reservoirs may be. The Moldovan company Ascom, partly financed by

3.1 Oil Reserves German SET, has drilled three dry wells in Block 5B on the East bank of the White Nile and subsequently In January 2009, official EIA estimates for Sudan’s oil closed down its exploration activities. The company’s reserves stood at 5 billion barrels. As some 65% of contract does not provide for funding or standards these reserves are in a limited number of large oil for abandonment and rehabilitation, raising fears that fields, new discoveries are most likely to be made in it may leave a foul legacy behind in Jonglei State. 7 a multitude of much smaller fields that will be The Sudan Tribune, in July 2010 reported that the relatively expensive to exploit. Sudan’s Ministry of GONU Energy Minister Dr. Lual Deng, warned Ascom Energy and Mining currently estimates proven to either regulate its presence or leave. 8 It has been recoverable reserves at 1.6 billion barrels. The best reported that the GONU Energy Minister Dr. Lual hopes for new finds are in Block B in Jonglei and Deng considers Ascom’s activities to be based on a Lakes State, and offshore in the Red Sea. 6 legally invalid agreement with Nilepet. Ascom’s position on this matter is not known.

Sudan’s oil exploration prospects seem bleaker 3.2 Exploration today than projected some years ago. In total, Sudan’s Muglad and Melut basins reportedly Sudan is divided into 23 prospective Blocks, which accounted for about 400 new wells in 2008 and are massive in size (averaging 61,000km² compared 2009. 9 There has not been any exploration activity in with 5,700km² for Libya and 1,500km² for Angola and Block 5A for years as the output of WNPOC-1 Nigeria). Block B covers 118,000 km², which is about cannot exceed 10% of GNPOC’s Unity field half the size of the UK. Contractually bound to production because the existing pipeline cannot modest exploration obligations, the companies have transport the type of oil that it produces unless it is only concentrated on the most promising areas. As a mixed with Nile Blend. 10 All the important new fields result, there are only 3 producing consortia in 7 that came online in 2009 were in Blocks that were producing Blocks, three of them mainly in the north already producing, such as the Qamari, Gumry and (2, 4 and 6) and four in the south (1, 3, 5 and 7). Most Moletta fields in Block 3, and the Haraz, Canar, of the remaining Blocks are leased by marginal and Suttaib and Kaitang in Blocks 1, 2 and 4. 11 In all, they inexperienced companies. Zafir Petroleum, for have compensated for the decline of the major fields instance, has a stunning gross acreage of 315,722km² in Blocks 1 and 2. Additional reserves have been (Blocks 9 and 11), but no previous operator ex per- identified in Blocks 3 and 7, at Galdora and Athieng ien ce. payams in Melut County; and further exploratory drilling has reportedly taken place in Longichuck Exploration results anywhere outside Upper Nile and County. 12 The official expectations are that by the South-Kordofan have been disappointing. Petronas end of 2010 Northern Sudan will produce app. discovered no oil in the Ethiopian Gambella region or 110,000 bpd, notably 50,000 bpd for the Northern the adjacent Sudanese areas north of the Sobat river parts of the GNPOC concessions, 60,000 bpd from and left the areas. The China National Petroleum the Al-Foula field and 5,000-10,000 bpd from the Corporation (CNPC) relinquished parts of Block 6 in Abu-Jabra field, both in Block 6. 13 For the longer 2005 since prospectivity for the new Block 17 (now term, Sudanese officials have expressed optimism ANSAN) was poor. APCO drilled five dry wells in about new finds soon in Block 8, though they have Block C in 2005-6 and then lost its international a track record of communicating inflated partner Cliveden Ltd. Expectations are modest for expectations. 14 The most promising newly explored Blocks C, 5B, E, 8, 9, 10, 11, 14 and for the last Block is 15, along the Red Sea coast, where the remaining open Block 12B in Darfur. Current seismic RSPOC consortium launched operations at the exploration activity in Block 12A involves the Tokar-1 field on 1 February 2010. 15

6. Interviews, February 2010; Global Times, 16 February, 2010 ECOS 11

Block 12a – Great Sahara 33% Qahtani 20% Ansan 20% Sudapet 15% Dindir 7% Hi Tech 5% A.A.In

Block 12B - free

Block 13 – CPOC 40% CNPC 15% Pertamina 15% Sudapet 10% Dindir Petroleum 10% Express Petroleum 10% Africa Energy

Block 14 – Salima 80% Fenno Caledonian Dongola 20% Sudapet

Block 15 - RSPOC 35% CNPC 35% Petronas 15% Sudapet 10% Express Petroleum 5% Hi Tech

Block 16 – Lundin 100% Lundin

Block 17 – ANSAN 66% ANSAN 34% Sudapet

Block A – SUDAPAK II 83% Zafir 17% Sudapet

Block B - TOTAL 32,5% Total 27,5% Kufpec Sudan 10% Sudapet 10% Nilepet 20% free

Block C - APCO 65% Hi Tech 17% Sudapet 10% Khartoum State Block 1, 2, 4 – GNPOC Block 5A – WNPOC-1 Block 6 – CNPCIS Block 9, 11 – SUDAPAK I 8% Hegleig 40% CNPC 68,875% Petronas 95% CNPC 85% Zafir 30% Petronas 24,125% ONGC 5% Sudapet 15% Sudapet Block E(a) 25% ONGC Videsh 4,125 7% Sudapet 75% Star Petroleum 5% Sudapet 20% Sudapet 5% Hamla Block 3,7 – PDOC Block 5B – WNPOC-2 Block 8 – WNPOC-3 Block 10 41% CNPC 39% Petronas 77% Petronas 85% Fenno Cal. 40% Petronas 13% Sudapet 15% Sudapet 15% Sudapet 10% Sudapet Ascom 8% Hi Tech 6% Sinopec 3% Al-Kharafi 12 Chapter 3

While earlier commercial drilling success rates of and Star Petroleum. Of the oil companies with a track around 60% have been very high, they have already record, only Chinese companies have so far dropped and may drop even further. 16 The dis - expressed genuine interest in post-referendum appointing exploratory drilling results in Block 5B investment in Southern Sudan. have forced Total to significantly downgrade ex - pectations for Block B, and to modify their work plan. The lack of interest from companies other than Contrary to Total’s earlier plans to combine seismic Chinese companies will oblige the SPLM to suppress exploration with drilling exploratory wells, the com - the tendencies within the party to avoid doing pany now intends to first improve its understanding business with Chinese companies because of of the geological structures through additional China’s friendship with Khartoum since 1995. It will seismic surveys in its three main prospective areas be equally difficult to convince local populations that north of Bor, between Bor and Rumbek, and Est of the presence of Asian companies is in their interest. Pibor town into Pochalla. According to Minister Lual Deng “security concerns at the local level” have been a major reason for Despite the reduced prospects, the Sudanese oil stagnating oil production figures as “communities sector continues to attract international attention. ask for compensation, and services etc. to the extent Vietnam’s state oil company PetroVietnam signed an that these moves lead either to some expansion agreement with the Government in December 2009. 17 plans being shelved or, even worse, production India’s Petroleum Minister visited Sudan in January stoppage.” 20 To ensure the industry’s continuity, 2010 and spoke in favour of intensified cooperation the GOSS will have to prioritize building a social between Sudan and ONGC Videsh Ltd. 18 And in support basis for the industry. This will require March 2010, Russia’s Sudan Envoy Mikhail Margelov reparations for past injustices and guarantees that met with the then Minister of Energy and Mining, Al- best international practices are applied. Zubair Ahmed Al-Hassan, to discuss Russian corporate involvement in the oil and gas sector. 19 On Another challenge for the GOSS is to offer the other hand, none of the international private oil commercially attractive conditions to the industry companies are showing any interest in actually while, at the same time, ensuring that more entering the market, with the exception of marginal advanced technologies are implemented. and inexperienced companies like Fenno Caledonian

Map 1: oil fields (circles) and related number of wells in Blocks 1, 2 & 4 in 2008. The brown dotted line is the North-South border. Source: IHS and GNPOC data.

7. For the full Ascom contract, see www.ecosonline.org. 8. “Total soon to resume oil exploration in Sudan's Jonglei – Minister”, by Alsir Sidahmed, in: Sudan Tribune, 8 July 2010. 9. Personal communication with industry insider, Khartoum, March 2010. 10. Personal communication with former CNPC staff member, Khartoum, February 2010. 11. Petronas Annual Report 2009, p.28. 12. Personal communication with UNMIS staff, Upper Nile, March 2010. 13. “North Sudan oil production to reach 110,000 bpd before year end: official” Sudan Tribune, 22 November 2010. 14. EIU June 2010 Report. 15. “CNPC Dives into Sudan’s Red Sea”, Petroleum Africa, March 2010. 16. “Sudan: Whose Oil? Facts & Analysis”, ECOS, 2008. 17. “PetroVietnam Expands into Sudan and Angola”, Petroleum Africa, 14 December 2009. 18. Press Trust of India, 25 January 2010. 19. “Darfur conflict is on the backburner, Russian envoy says”, Sudan Tribune, 11 March 2010. 20. “Total soon to resume oil exploration in Sudan's Jonglei – Minister”, by Alsir Sidahmed, in: Sudan Tribune, 8 July 2010. ECOS 13

4. Infrastructure

With all the producing fields located in central Sudan, b/d. Plans for an additional 100,000 b/d refinery in Port the oil sector had to construct a costly export Sudan for Dar Blend, planned in 2005, were cancelled infrastructure, including two refineries, an export in 2009. Petronas eventually decided against this terminal in Port Sudan and three main pipelines. investment, citing the anticipated costs of the project Should the South vote in favour of secession in 2011, (US$ 5 billion instead of US$ 1-2 billion). it would give the North considerable leverage over the South’s sole independent source of income. Oil infrastructure in Southern Sudan has so far been limited to oil extraction facilities. However, antici pa- ting a possible yes-vote on secession in 2011, the former GOSS minister, John Luk Jok, announced in 4.1 Refineries October 2009 that his government was planning “to make a refinery (in) Akon, Warap state (which) would Sudan has two refineries with a total capacity of process oil produced from Block 5A. The new 121,700 b/d. One, Al Jalia, is located north of refinery will serve all the seven states west of the Khartoum, and the second in Port Sudan on the Red Nile”. 21 The public tender for the construction Sea near the export terminal. The former was set up as contract was issued in April 2010. Estimated costs a 50/50 joint venture between the Government and the are US$ 2 billion, and financing has yet to be CNPC and has a refining capacity of 100,000 b/d in secured. Officials from the GOSS Ministry of Energy 2010. A major upgrade is long overdue, and in 2010 and Mining consider the Akon refinery project an Sudan signed a deal with CNPC to build extra unlikely option because the location would not make capacity of 50,000 b/d, to be financed by CNPC. economic sense. 22 In November, the GOSS Minister Earlier plans to upgrade the refinery by 100% to of Energy and Mining, Diing Akuong, stated that the 200,000 b/d were cancelled, due to Sudan reportedly South would continue using Port Sudan for oil being unable to pay for its 50% share of the deal. refinery after secession. 23 Jonglei State is set to Instead, CNPC decided to finance half of the house a new oil depot along the river near Bor worth anticipated upgrade. The Port Sudan facility is 5 million SDG, to be serviced by barges arriving from Sudan’s smallest refinery, with a capacity of 21,700 further north. 24

Figure 2: Pipelines in Sudan

21. “South Sudan to build its first oil refinery in Warrap state”, Sudan Tribune, October 4, 2009. 22. Personal communication with GOSS Official, Juba. October 2010. 14 Chapter 4

4.2 Pipelines in Lamu on the Kenyan coast, at the cost of US$ 1.5 billion. 25 This scheme would have a capacity of Sudan’s pipeline network consists of two major 450,000 b/d. Beijing is reportedly considering segments. In August 1999, the 28 inch, 1610 km backing the project. 26 It is currently believed that Greater Nile Oil Pipeline was opened, connecting there is quite a lot of activity in Kenya from oil-related Heglig with Khartoum and Port Sudan at a maximum Chinese companies who, it is assumed, are building capacity of 450,000 b/d but never pumping more financial and organizational structures to prepare for than 300,000 b/d. It is operated by GNPOC. In 2005 the development of Kenya’s oil fields, which would following considerable delay, the 32 inch and US$ indicate strong confidence in the presence of 1.2 Billion Melut Basin Pipeline was inaugurated. It commercial quantities of oil. 27 If the fields in Northern runs from Adar Yale to Port Sudan, has an initial Kenya are indeed developed, the necessary capacity of 180,000 b/d and a maximum capacity of infrastructure may be partially shared with Southern 500,000 b/d and is operated by Petrodar. Should Sudan, thereby lowering the costs of a Kenyan commercial quantities of crude ever be discovered in export alternative for Southern Sudanese crude. Block B, extending this pipeline may be the most economical way of exporting it. In addition, Block 6 Building an oil pipeline right through the Rift Valley to is connected with a 24 inch, 760 km pipeline to the Sudan would pose serious technical and Khartoum refinery, built at a cost of US$ 352 Million environmental challenges and may encounter stiff and operated by the CNPC with a maximum capacity opposition from Kenya and elsewhere. Sudan’s of 200,000 b/d, but running at 60,000 due to capacity newly appointed Minister of Energy and Mining, Dr. restrictions at the Khartoum refinery. Lual Deng declared on 7 July 2010 that a pipeline through Kenya would be uneconomical and The SPLM has repeatedly expressed a desire to end expensive. However, a representative of the GOSS its dependency on Northern Sudan by building its Ministry of Energy and Mining told ECOS that this own oil infrastructure through Kenya. Kenya itself is was not the position of the SPLM. 28 Unless oil is keen to develop a combined oil-road-train corridor found in Northern Kenya and Southern Sudan, the from Lamu to Sudan and Ethiopia. In early 2010, Kenyan route is serving political rather than Japan’s Toyota Tsusho Company announced its economic objectives. It will therefore have to find interest in building a 1,400 km pipeline from South funding among politically motivated financial sources Sudan to an as yet to-be-built export coastal terminal rather than the mainstream financial markets.

Map 2: Main pipeline (thick) and feeder pipelines (thin) in Blocks 1, 2 & 4 in 2008. The brown dotted line is the North-South border. Source: IHS and GNPOC data.

23. Garang Diing Akuong in an interview with Sudan Radio Service, ‘GOSS Will Continue Using Port Sudan For Oil Refinery Incase Of Secesion, Says Official’, 9 November 2010. 24. Interview with GOSS Minister of Energy and Mining, Juba. May 2010. 25. “Japan group eyes oil pipeline plan”, Financial Times, 3 March 2010. 26. APS Review Oil Market Trends, 8 March 2010 27. Personal communication with a senior diplomat, Juba, July 2010. ECOS 15

5. Oil Consortia & 5. Production Volumes

Four consortia currently account for all Sudan’s oil defined, North-South border, its operations are still production. There are only five international com - at the heart of the disputes that jeopardise the panies holding shares in these consortia, in addition peaceful end phase of the CPA. In June 2009 the to Sudapet, the Sudanese national oil company. 29 As Abyei Arbitration Tribunal of the Permanent Court of is typical in Sudan, the Blocks are jointly operated by Arbitration in The Hague, decided that the major oil the members of the consortia through tailor-made fields in Block 2A and 2B (Heglig and Bamboo) were operating companies, i.e. GNPOC, WNPOC and outside the Abyei area. 30 With demarcation of the Petrodar/PDOC. North-South border close to completion, it seems likely that these two ageing fields will be defined as part of Northern Sudan.

5.1 In the Driver’s Seat: Asian Production Blocks 1, 2 & 4 In September 1999, the first cargo of crude left the 5.1 National Oil Companies export terminal. In 2008, combined production from Blocks 1, 2 & 4 was estimated at just over Sudan’s second civil war offered a unique 210,000 b/d of Nile Blend, reflecting a decline from opportunity for CNPC and Petronas to acquire assets its peak production of 328,000 b/d in 2005. It is in an oil-rich area that was out of bounds for the believed that GNPOC’s past policy of pumping as international oil majors. They found partners in much and as quickly as possible may have caused Sweden’s Lundin Oil, Austrian OMV AG and Ca - a loss of production potential. The ten fields lo - nada’s Talisman Energy, all three eager for Chevron’s cated in Unity and Heglig (with over 400 wells in discoveries. Chevron had invested US$ 1 billion in 2008) have estimated produced water ratios the late 1970s and early 1980s and the oil fields that exceeding 65%, up to 80%. Overall production it had found were up for grabs. As fas as we can output in 2008 fell steadily, and is expected to last discern, none of the companies publicly showed for another 3-5 years, depending on the com - concern for the terrible dangers their operations pany’s assessment as to when it is no longer represented for the population in this war-torn profitable to extract the remaining reserves. country. In 2003, OMV (Austria) and Talisman Energy GNPOC has reportedly made enhancing opera - (Canada) decided to leave Sudan and sold their tional efficiency a priority, rather than maximizing assets at a considerable profit. ONGC Videsh Ltd. production by drilling additional wells. from India bought Talisman’s shares, consolidating the dominant position of Asian NOCs in Sudan’s oil industry. Lundin Petroleum (Sweden) sold its share in New wells and modern technologies may add 5% to Block 5A also in 2003, but retained its interest in GNPOC’s current recovery rate of 25%, shifting the Block 5B until 2009, while still retaining its 100% curve towards the right and adding several years to interest in the inactive Block 16. GNPOC’s projected existence. To make the required investments commercially attractive, it might be necessary to renegotiate the percentage of future production that goes to the government and the 5.2 GNPOC (Blocks 1, 2 & 4): consortium in favour of the latter. 5.2 Nile Blend

Principally led by the Chinese National Petroleum 5.3 Petrodar/PDOC Company (CNPC), GNPOC is the largest and most experienced oil production company to date in the 5.3 (Blocks 3 & 7): Dar Blend country. GNPOC developed during wartime when it served as a powerful Government ally during a time Dominated by CNPC and Petronas, PDOC was when the Government hoped that oil revenues would Sudan’s most lucrative operating company in 2009. eventually tip the military balance. Close to the When Dubai-based Al-Thani sold its 5% share in disputed area of Abyei and straddling the, yet to-be March 2008, Sudapet acquired 2%, while selling the

28. Personal communications, Juba, October 2010; “Total soon to resume oil exploration in Sudan's Jonglei – Minister”, by Alsir Sidahmed, in: Sudan Tribune, 8 July 2010. 29. CNPC (China), ONGC Videsh Ltd. (India), Petronas (Malaysia), Sinopec (China) and Tri-Ocean (Egypt). 30. Abyei Boundaries Commission ruling, July 2009. 16 Chapter 5

remaining 3% to Kuwaiti company Al-Kharafi, make it commercially attractive to explore Block 5A making it currently the only non-Asian company with more comprehensively. According to Bloomberg, a share in a producing consortium. Sudapet’s share CNPC and Petronas agreed to swap equity, in PDOC is its highest in any producing consortium, exchanging some of Petronas’ WNPOC-1 shares for effectively raising the GONU’s share in overall some of CNPC’s shares in Petro Energy (Block 6). 32 generated revenues by about 2%. Details of the deal have yet to be made public .33 This move would increase the mutual dependency of the three major companies. Production Blocks 3 & 7 Blocks 3 & 7 contain the Adar Yale and Paloich oil fields, with estimated recoverable reserves of 460 million barrels. The PDOC project includes a 5.5 Petro Energy (Block 6): 300,000 b/d central processing facility at Al- Jabalayan and major production facilities at 5.5 Fula Blend Paloich. In 2008, production from these two Blocks was approximately 200,000 b/d. Output Led by CNPC, this is the only producing Block that is rose significantly in 2009 thanks to the new Qamari entirely located in the North. Its output is not exported field, which is expected to ramp up production to but sent along a 760km pipeline to the Al Jalia refinery 50,000 b/d by 2010. Industry insiders say that in Khartoum. Operating on the border between South since its inception, approximately 100 new wells Darfur and South Kordofan, Petro Energy has been have been added each year, and that Blocks 3 & 7 faced with serious security issues. After the killing of are close to – or already beyond – the production several engineering personnel in May 2008, peak. PDOC expects production to decline from production temporarily fell by 72%. 35 Unless the Darfur 2013 onwards. 31 conflict is settled, operations near its border will continue to be a high risk for companies, their staff and the local population. As these operations 5.4 WNPOC-1 (Block 5A): frequently require a heavy security presence by the Sudanese security forces, there is the continuing 5.4 Nile Blend danger of violent conflict between Darfuri rebel groups and Government forces. This circumstance requires In April 2005, the Government of Sudan signed a US$ the companies to carefully assess any risk that they 400 million agreement with White Nile Pe troleum may become legally complicit in international crimes. Operating Company (WNPOC-1) for the development of the Thar Jath and Mala fields on Block 5A. Led by Block 6 Production Petronas, WNPOC-1 has remained a minor player, In November 2004, CNPC brought the Fula field currently producing 17,000 b/d. Because of the online at a rate of 10,000 b/d. Current output production restrictions, there has been no exploration comes from a total of 8 oil fields and stands at since 2005 (see box). The GOSS’ plans to build a top- 40,000 b/d of highly acidic crude. Further up refinery nearby to serve the national market may investments are expected, as CNPC reportedly found 36 million barrels of recoverable oil in the Block 5A Production western part of the Block. Efforts are under way to The first oil from Block 5A came online in June boost production in the near future, including two 2006 at an initial rate of 38,000 b/d. In 2008, the new flow stations and oil storage tanks (each field was still producing around 25,000 b/d, full 50,000m³). While the Block’s oil goes straight to capacity is estimated at 60,000 b/d. The Thar Jath Khartoum, connecting the field to the Nile Blend crude’s quality is poor and has to be mixed with pipeline is reportedly being considered. 36 Nile Blend to prevent a price discount. 34 WNPOC- 1 cannot produce more than 10% of GNPOC’s 5.6 Total-led Consortium total output. Increasing the percentage is bound to affect the quality of the Nile Blend. Block 5A’s 5.6 (Block B) production was therefore in decline for 2008 and 2009, in conjunction with the decrease in This consortium is still being formed. Marathon Oil GNPOC’s production. The SPLM has announced Corp. has been unable to keep its 32.5% interest in that plans for a refinery in Warap State would meet the Block because of US sanctions. In 2007, South domestic needs and is meant to receive Sudan’s Nilepet obtained 10% and Kuwaiti Kufpec production from 5A and potentially 5B. This may Sudan Ltd. obtained another 2.5%, raising its stake boost production levels and encourage WNPOC- to 27.5%. This compensated for the entry of Nilepet 1 to restart exploration activities. and meant that the private companies in the

31. Interview with PDOC staff, Khartoum, February 2010. 32. “Sudan: CNPC swaps asset interest with Petronas and signs oil refining deal”, Bloomberg, 20 November 2009. 33. “CNPC, Sudan Sign Oil Refining, Asset Swap Agreements (Update2)”, Bloomberg, November 20, 2009, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=abhOz4OOU2_s 34. Personal communication with industry insiders, Khartoum, 2010. 35. ECOS calculation, based on data from Ministry of Finance and Economic Planning. ECOS 17

Projected decline in oil production

Figure 3: projected decline in production in Blocks 1, 2 & 4, and 3 & 7. Data source: GNPOC and PDOC data (GNPOC 2020-2025 are ECOS’ estimations). consortium must bear 20% instead of 10% of costs, leadership, and a definitive solution to the as neither of the state companies are investing any consortium’s vacant 20% ownership. The SPLM money. The remaining 20% are expected to be leadership is unhappy with the virtual monopoly of offered by Total in a public bid. Currently, Mubadala Asian state oil companies and keeping Total on board Development Company, a wholly-owned investment is the best available option. Total is arguably the most vehicle of the Government of the Emirate of Abu sophisticated and technologically advanced Dhabi, is reportedly likely to acquire an interest in company in the country and if it decided not to Block B. Completion of the consortium is a pre - develop its interest, it would damage the prospects requisite for starting operations. The consortium’s of Sudan’s oil industry and send a bad message contractual obligation to carry out operations is about Southern Sudan’s investment climate. This currently temporarily suspended as a result of force puts Total in a relatively strong negotiating position majeure circumstances. Total’s prominent position in when the issue of redrawing concession areas the South is disputed because of France’s military comes up. support for the Government during the civil war. In 2010, CNPC, Petronas and ONGC account for over Senior SPLM officials have on several occasions 90% of Sudan’s petroleum production. Not only are expressed unhappiness with the excessively large these companies important to Sudan, Sudan is also surface areas of the oil concessions, including the important to them. Sudan is among the largest 100,000km2 Block B. On 8 July 2010, Total held overseas operations of all three. They are discussions with the GONU Minister of Energy and predominantly state-owned, making them resistant to Mining, Dr. Lual Deng, in which the company is shareholder activism or public advocacy, and their believed to have sought guarantees that its contract investment decisions are made on country rather than will be respected post-referendum. The company has on company level. Their relations with Sudan are so far successfully warded off pressure to set a defined not only by economic terms, but also resumption date for its operations. Before investing represent geo-strategic investments. China, India and serious money, the Total-led consortium will need Malaysia have each rolled out diversified investment certainty about the post-referendum legal and strategies in Sudan. Together with Gulf state equity, security environment, including the outcome of a this has resulted in sustained high national economic possible contract review process, export guarantees, growth figures. While their investments were highly unambiguous political support from the SPLM profitable until 2008, Petronas and ONGC are currently

36.MEES, 1 June 2009. 18 Chapter 5/6

citing commercial losses in Sudan as drivers for Exploration and Production Agreements investments else where. In a 2010 management Exploration and Production Sharing Agreements reshuffle, Petronas even announced shifting its (EPSAs) determine the contractual obligations investment focus back to domestic exploration. 37 The between the government and the companies. In waning exploration activities in Sudan since 2008 can this type of contract part of the oil produced, so- also be explained by the uncertainty about the end- called ‘cost oil’, pays for the costs of exploitation, phase of the CPA and fears that 2011 may see while the remaining part, ‘profit oil’, is split violence in the oil producing areas. between the Government and the companies. In Sudan’s oil production output peaked in 2008. principle, this means that higher production rates National crude oil production averaged an estimated have an exponential impact on government 457,000 b/d in 2007, and in 2008 480,000 b/d, with revenues: the more barrels per day, the greater the occasional peaks of 540,000 b/d. 39 In 2009, this share for the public coffers. When negotiating post-2011 arrangements, the SPLM is expected to respect the existing contracts to protect its reputation in international markets. 38

6. Production Trends

figure declined some 4% to an estimated 459,000 prices acutely stressed the budgets of both GONU b/d. 40 2010 is believed to be slightly better with a first and GOSS, indicating irresponsibly optimistic 6-months’ average output of 514,000 b/d. 41 While the financial management. The 2008 oil revenues may lion’s share of that production is exported, national remain Sudan’s all-time high, as demand for oil is not consumption is also increasing slowly, averaging an likely to grow strongly and oil investments in Sudan estimated 85,000 b/d in the period 2005-2009. have dropped considerably since 2008. The fact that the Government of Sudan has pulled out of initial International oil prices had just begun to rise by the offers to finance investments in the oil industry time Sudan’s first fields came on stream in 1999, to infrastructure projects may indicate that, despite peak spectacularly in 2008 at around US$ 150, then continued pronouncements of high future production fall sharply and currently stabilizing around his to ri- levels, it no longer believes in major production cally high levels of US$ 75 per barrel. The fall in increases.

Figure 4: Oil Production, Export and Consumption, 1999-2009. Source: EIA 2009 and Petroleum Unit (GOSS) Khartoum.

37. Business Times, 5 June 2010. 38. Personal communications with GOSS officials, Juba, October 2010. 39. EIA Sudan Country Analysis Brief, 2009; BP Statistical Review 2008. 40. This figure is based on the Sudan Petroleum Unit Report 2009. 41. Petroleum Africa, October 2010. ECOS 19

Figure 5: Oil Production per Block 2008-June 2009. Source: Petroleum Unit (GOSS) Khartoum.

In general, Sudan’s oil production has been flattening Despite these discouraging figures, some analysts out. Major fields are maturing, and while new fields continue to believe that Sudan’s oil production is yet have compensated for this decline, production totals to peak. Business Monitor International forecasts have fallen short of expectations. Petronas’ 2009 771,000 b/d in 2013. 45 Similarly, Sudapet stated in annual report even lists the decline in Blocks 1, 2 & 4 July 2009 that it expected overall output to reach as the reason for the overall decline in its overseas 922,000 b/d in the near future as a result of enhanced operations. Officials speak of an expected 480,000 recovery techniques. Details were not given b/d in 2010, despite various efforts to increase regarding time frame and location of the oil wells production. According to Reuters, delays in 2008 in affected. 46 However, because the Government of implementing new methods to reduce large amounts Sudan has repeatedly overstated its expectations, of water produced with Nile and Dar Blend forced production forecasts by the Government are not Sudanese officials to voice lower expectations for universally accepted at face value. 2009 from 600,000 b/d to 480,000 b/d. 42 The Government’s 2006 estimate for 2010 was 1,000,000 b/d – more than double actual production.

The rig count for Sudan confirms stagnation in terms of active wells and exploration efforts. According to Petroleum Africa, active rigs in the country peaked at 29 in April 2008. By May 2009, the number of active rigs was down to 24, dropping to 21 in August 2010. 43 According to industry insiders, this trend is reflected by a general reluctance of the major consortia to sign large procurement contracts in the course of 2009 and 2010.

Technology upgrades Until now, the average recovery rate – the percentage of oil-in-place that is actually produced - in Sudan is estimated to be quite low at 23% , compared to a world average of 30%. Sources within the industry believe that this may be increased to 37%. A recent initial study estimates that much more oil could probably be recovered by using more advance recovery methods such as injection of water with chemicals or injection of gas. The Norwegians, who head the study project, state that “more advanced well-technology can also reduce the very high water production level and increase oil production. This can potentially reduce one of the biggest environmental chal lenges related to the oil industry in Sudan: handling of produced water.” 44 A higher recovery rate may eventually offset part of the current production decline.

42. Reuters, 25 October 2009. 43. By December 2009, Schlumberger's subsidiary MiSwaco counted only 20 rigs in Sudan. 20 Chapter 7

7. Management and Revenues

Oil money is hard to trace in Sudan’s economy. In a there is hardly anybody to match that in the South. country as vast as Sudan, with virtually no Currently, only 8 Nilepet staff have been detached to infrastructure in the remote areas and no political Sudapet. Reportedly, GOSS has largely rejected commitment to transparency, verification of hard taking advantage of existing training opportunities for data remains elusive. A 2009 report published by GOSS petroleum experts at the Petroleum Training Global Witness provides valuable insights into the Center in Khartoum. Having rented a permanent intricacies of the sector, particularly regarding the guesthouse in Khartoum in 2010, the GOSS is way revenues are shared between the CPA currently planning more training programmes for the signatories. Other aspects of oil finances are no less near future. difficult to come by, but a general picture emerges from information compiled from various sources. The National Petroleum Commission, theoretically the regulatory body in charge of formulating, monitoring and assessing policies for the oil sector, has been ineffective. Apart from its two successful 7.1 Institutional Set-up rulings on the legality of specific contracts and some adjustments to consortium membership shares, the Sudapet, together with the Ministry of Energy and NPC has not lived up to its mandate. 49 Mining (MEM) are the entities responsible for the management of the petroleum sector and they have kept the industry on a short leash. Operating companies report directly and in detail to Sudapet 7.2 Production costs officials. The division of responsibilities between the MEM and Sudapet are difficult to discern from the Major infrastructure in Sudan operates under joint outside, as is the actual hierarchy inside the decision- ownership arrangements. For example, Khartoum making institutions. Meanwhile, in response to their and CNPC each own 50% of the Khartoum refinery, contractual obligation, and thanks to the scaling up a similar arrangement is in place for the Greater Nile of training policies, all consortia currently employ a Oil Project (GNOP) pipeline. 50 Because Khartoum majority of Sudanese nationals in professional owns part of the pipeline, operational costs for positions. This potentially provides the country’s companies de-facto include pipeline usage. These leadership with a strong intelligence position. tariffs vary per location. Rates for 2008 range from $4 to $8.6 per barrel, with Blocks 1, 2 & 4 accounting According to one senior manager from an inter - for the lowest, and Block 5A the highest fee. Pipeline national oil company working in Sudan, oil consortia costs for Blocks 3 & 7 are standing at US$ 5.5. 51 are not free to recruit their Chief Security Manager, These fees are worth millions of dollars a month, with but are compelled to employ officers with military or a reported total of $44 million in September 2008. 52 other security backgrounds, who are designated by Additional operating costs are estimated to be the Ministry of Energy and Mining. 47 If this is correct, between $1/bbl and $3/bbl. Independently verifiable the relationship raises for clarification who non-expat data are unavailable. In official records, operating security staff of the oil industry effectively report to, costs are sometimes labelled management or the country’s security agencies instead of the transport fees and account for 3%. 53 In some 2009 companies’ management? 48 statistics for local revenues, management fees for Blocks 1, 2 & 4 account for as much as 12% of total Southern Sudan’s Nilepet is nowhere near to revenue. 54 becoming a fully-fledged operating company. With some thirty staff members and a mere 10% share of Additional costs are arising from insecurity in some non-producing Blocks 5B and B, Nilepet has so far parts of the country, particularly in Southern Sudan, been a company on paper rather than in practice. where the memories of the oil wars are still alive and Only in June 2009 did it receive its formal status as many perceive the oil companies as allies of the NCP the commercial arm of the Southern Ministry of working against the interests of South. The industry’s Energy. Since 2005, the Ministry itself has made no legacy of inconsiderate behaviour towards local substantial progress in building the necessary communities has created popular resentment capacity to manage the petroleum sector. Con - towards the industry. There are abundant examples sidering that the South may secede in 2011, this is of sabotage and vandalism, mostly attributed to extremely worrying. While there are some 400 ex- popular grievances against the industry. In 2008, perienced government professionals in Khartoum, GNPOC reported to GOSS and GONU that local

44. Royal Norwegian Embassy in Khartoum, 7 November 2010; http://www.norway-sudan.org/News_and_events/Oil-recovery-from-oil-fields-in-Sudan-may-be-substantially-increased/ 45. Business Monitor International, Sudan Oil and Gas Report Q4 2009. 46. Reuters, September 2009. ECOS 21

People outside a mosque, donated by Petrodar, in New Paloich. The inhabitants turned it into a church as very few Muslims live in the area.

disturbances had resulted in production stoppage at 7.3 Profitability the cost of US$ 10.7 million in the first half of that year, more than twice the amount GNPOC claimed With the exception of WNPOC-1, Sudan’s producing to spend on community programmes in 2010. 55 consortia have been exceptionally profitable. This is Stoppages figure high on the GONU-GOSS agenda. essentially because their contracts were negotiated when oil stood at US$ 20 a barrel. They have not been The impression within local communities is that most adjusted to prevailing market conditions while contracts community projects by oil companies are either a provide that the upstream businesses are tax exempt. 57 response to particular incidents or part of a strategy In addition, the industry has kept costs low. The to build relationships with local authorities, rather consortia’s profits are mainly derived from their right to than communities. 56 Instead of building mutual res - a contractually fixed percentage, between 20% and pect, the prevailing policy of buying goodwill through 40%, of ‘profit oil’. It obviously makes a massive projects is creating a patron-client relationship that difference whether that share can be sold at US$ 20 or rewards spoilers and reinforces a vicious circle of at S$80 a barrel. Oil prices reached an average of US$ blaming and claiming. The industry’s tendency to 110 a barrel in 2008, and US$ 63 in 2009. relate with society through Governors and Com - missioners is short-sighted and unsafe as the com - munities regard them with great suspicion. Building a 7.4 Revenue Sharing social support basis for the industry requires a radical change in the relationships between companies, According to the CPA, net revenues from the authorities, and communities. Government’s share of oil produced in the South are

47. Personal communication with senior industry executive, May 2009. 48. “Unpaid Debt: The Legacy of Lundin, Petronas and OMV in Block 5A, Sudan 1997-2003”, ECOS, June 2010, p. 79. 49. “Energy Politics and the South Sudan Referendum”, d’Agoot, Majak, Middle East Policy, December 22, 2009; “Crude Days Ahead? Oil and the resource curse in Sudan”, Patey, Luke, African Affairs, August 12, 2010. 50. Ownership shares for GNOP are not disclosed. However, it is clear that full ownership will go to the national authorities after a certain period, reportedly 2014 for GNOP and 2021 for the Adar Adar Yale-Port Sudan pipeline. 51. Joint Technical Committee for Oil Revenue Distribution. 52. “Fuelling Mistrust”, Global Witness, September 2009, p.44. 53. This figure was revised from 5% in 2007. Global Witness, “Fuelling Mistrust”, September 2009, p. 44. 54. Ministry of Finance and Economic Planning GOSS, Petroleum Unit Khartoum, June 2009 data. 22 Chapter 7

a 49-49 split between GONU and GOSS, while 2% is For instance, the majority of personnel on the oil sites allocated to the respective oil-producing States. If are recruited through Petroneeds. Petroneeds is not Sudapet’s share is taken into account, GONU’s only a labour recruitment agency but also a security effective share of Southern oil is likely to stand at company. Initially, applicants for jobs reportedly had 51% compared with 47% for the GOSS. The GOSS to produce a National Services Certificate - the does not share in oil from the North, about 30% of document issued after completing military service - national production. This so-called Wealth Sharing to be eligible for a job, putting Southerners at a Agreement is the backbone of the CPA and it seems distinct disadvantage. 60 The consortia are reportedly to have been largely respected. Taking the political obliged by the MEM to exclusively use Petroneeds’ history of the country into account, this was a major services. Total is believed to have had difficulty achievement, inspiring confidence in the ability of obtaining permission from the former Minister of both NCP and SPLM to reach workable post- Energy and Mining Al-Jaz not to contract Petro - referendum agreements. needs. 61 In a few years, Petroneeds has become one of the country’s largest companies. There are reasons While effective, oil revenue sharing has not been to suspect that its General Manager, Salah Al-Tayeb, flawless. The GOSS has received US$ 5.1 billion holds the rank of General in the National Intelligence since 2007 ,58 but a lack of transparency and inde - and Security Service (NISS). Customers have expres - pendent verification of reported data have fuelled sed concerns that Petroneeds substantially over - suspicions that the GOSS may have been duped. charges. 62 In addition, leading politicians re por tedly These suspicions focus on a lack of verification of have personal business interests in the oil industry reported production levels and realized prices. 59 and there are no known mechanisms in place that would prevent them from abusing their position. 63 Strangely, no suspicions have been publicly ex pres - sed about the potential for fraud on the cost side. All In addition to the political power play over the CPA costs of exploiting oil are paid for by so-called ‘cost provisions on oil revenues, discord about Abyei’s oil’. The oil that remains is termed ‘profit oil’ and split new borders is another stumbling block to straight- between companies and the Go vern ments. Ten - forward revenue sharing. Since the Permanent Court dering processes are not transparent and inter - of Arbitration in The Hague has defined the final and national companies are somewhat reluctant to binding territory for the area, the Heglig oil field, participate, reportedly out of concern for prior back- which accounts for some 57% of Abyei’s oil output ,64 door dealings. Oil companies are reportedly coerced has been shifted into Southern Kordofan State, behind closed doors to award contracts to des ig - which is part of the North. This means that as of nated companies, leading to inflated prices and September 2009, oil revenues from Block 2 are not creating ample opportunities by the political elite to shared. Even though the North-South border cream them off. demarcation process could again place Heglig in the

Figure 6: Net revenues from oil produced in Abyei in 2009 (in Million U$). Source: Petroleum Unit GOSS.

55. GNPOC presentation, UNGC conference, Khartoum, 1-2 March 2010. 56. Personal communications, Khartoum, Juba, Melut, February-October 2010. 57. See: http://www.mbendi.com/indy/oilg/govo/af/su/p0005.htm, and GNPOC contract at www.ecosonline.org. This tax exemption does not seem to be fully effective; for example, Total is believed to pay taxes to the Government of Jonglei State, possibly without a legal obligation to do so. 58. According to the AEC, GOSS confirms having received US$ 1,385.67 million in 2007, US$ 2,598.66 Million in 2008 and US$ 1,169.35 million 2009. ECOS 23

Figure 7: Sudan’s oil export value declined sharply in 2009. Source: Bank of Sudan.

south – as has been demanded by SPLM officials – prices fell as suddenly as they had risen. Sudan’s oil- insiders doubt whether this will happen and Heglig related income plummeted by 60% in 2009 will most likely stay in the North. compared with 2008 from US$ 6.5 billion to US$ 2.5 billion. The Government of Southern Sudan had to cut its budget by a third, from 5.5 billion SDG in 2008 to 3.6 SDG in 2009. The IMF estimates that Sudan’s 7.5 Value of Oil Exports foreign exchange reserves went from US$ 2 billion in mid-2008 to US$ 300 million in March 2009. This Sudan’s total oil export revenues peaked in 2008 at represents merely two weeks of the country’s US$ 11.1 million and fell to US$ 6.8 million in 2009. imports. As a consequence, Sudan’s oil industry is According to State Minister of Finance Al-Tayib Abu- becoming less significant for its overall economy, Gnaya, in 2009 “we barely covered [our expenses] both in absolute and in relative terms. for the first quarter in the budget. We still had to borrow from the banks”. Sudan has seen strong macro-economic growth figures for a decade, largely driven by the oil industry. The maturing fields under GNPOC management A large majority of the population, however, is active in have declined both in overall output and in export economic sectors that are disconnected from the oil value. The Dar Blend from Blocks 3 & 7 is currently economy. A substantial percentage of oil revenues the predominant money maker. have gone into the government apparatus, most notably the security sector, and neither GONU nor GOSS prioritize pro-poor growth policies. Overall service delivery has not improved since 1999 and only 7.6 Macro-economic impact a small part of the population has seen its income grow substantially. In its 2010 country report, the World Bank Both GONU and GOSS have over-budgeted for 2009 urges Sudan to push towards greater diversification in and both had to make painful adjustments when oil order to lessen its dependence on oil. 65

59. “Fuelling Mistrust”, Global Witness, September 2009. 60. Personal communications, Khartoum and Juba, 2008-2010. 61. Personal communications, Khartoum, 2006. Awad Ahmed al-Jaz is currently the national Minister of Industry. 62. Personal communications, Khartoum and Juba, 2008-2010. 63. Ali Al-Bashir, the President’s brother, is a senior manager of Hi-Tech Petroleum Group, see: The Economist, “The Oil Factor”, 21 June 2007, http://www.economist.com/node/9377227?story_id=9377227; Jarch Management Group (formerly in the oil business, currently in agriculture) holds strong links with senior SPLA officers, see: Sudan Tribune, “New SPLA General, Tanginya becomes advisor to US company Jarch”, 23 October 2010. 64. Sudan Petroleum Unit: GOSS Export Revenue in June 2009. 65.World Bank Sudan Country Report, June 2010. 24 Chapter 7/8

Figure 8: Export Revenue Production from active Blocks. Source: Petroleum Unit GOSS

8. Investment & Outlook

The most immediate challenge for post-referendum profitable business. However, due to declining negotiations is to keep the oil flowing. For the profitability and political uncertainty, important industry’s development in the medium and long- anticipated invest ments have been called off. term, it is vital that NCP and SPLM develop a Sudan’s MEM has been unsuccessful in its efforts shared vision. Some believe that the coming five to keep its Chinese partners to commit to a full years will see a steady decline in oil production and 100,000 b/d upgrade of Khartoum’s Al Jaila refinery the operating companies will be ending production and early 2010, CNPC decided to pledge only half for lack of profitability. Others expect major new its originally announced financial commitment. finds in the large unexplored acreage and predict Petronas decided against building the new Dar that Sudan will be producing substantial amounts Blend refinery in Port Sudan. The fact that WNPOC- of oil for another decade. The latter scenario 1 reportedly halted operations during the elections requires political stability, an improved popular as part of a zero-risk policy indicates that political support basis, and attractive commercial con- risks are also high on the industry’s radar screen. ditions. Either way, one has to keep in mind that for the Asian state-owned companies, Sudan does not At the other end of the spectrum, small companies only offer potential profits, but also a geo-strategic with limited or no expertise in oil production continue investment at a time of dwindling fossil fuel stocks, to be involved in the sector. Several of them have that may be worth maintaining even at low profitable failed to discover oil, including Ascom in Block 5B, margins. White Nile in Block B, and APCO in Block C, resulting in losses of hundreds of millions of dollars for their undisclosed financial backers. Others have simply been holding on to their concessions, including Zafir 8.1 Volatile Business in Block A. Yet others are trying their luck. In August 2010, the minor company Star Petroleum, legally 8.1 Environment based in Luxembourg with Spanish connections, signed an Exploration and Production Agreement Sudan’s oil sector has developed despite (EPSA) for Block Ea, formerly claimed by Spanish H- significant business risks. As a consequence, some Oil. In August 2010, the London-based company with may argue, Sudan is likely to attract three types of Finnish connections, Fenno Caledonian, also signed oil investors: those who believe that they can an EPSA for Block 10. Neither company has manage the risks, others who seek opportunities experience in delivering exploration and production where there are high risks, and finally those who are projects. reckoning with a significantly lower risk profile post- No major new investment round is likely to occur referendum. before the post-referendum period has delivered a The three leading companies have made sub - stable and predictable legal and political en viron - stantial investments and are keen to sustain their ment. 5

2

. 0 1 0 2 , y e v r u S s m r A l l a m S A B S H : e c r u o S . s d l e i f l i o y b r a e n d n a i e y b A : 7 p a M S CO E

I 8Yp\`Xe[e\XiYpf`c]`\c[j =lcXEfik_ )''bd <>PGK \ [  C@9P8 J \

`c\ E\\d E 8Yl>XYiX E@C< :?8; EFIK? ;8I=LI B?8IKFLD B8JJ8C8 J F L K ?  B F I ; F = 8 E B_Xikfld

EFIK? ><;8I<= NXiXX[ EFIK??8Q8C )0²''Ë

).²,'ËC<@ X ?8Q8C C8B

F i\ B_X`iXkEfik_\Xjk L>8E;8 c8iXY Le`kp B_X`iXk 9fle[Xi`\j F`c]`\c[ EXk`feXcZXg`kXc LE@KP 8Yp\` gif[lZ`e^)''- 9\ek`l 8nXi[8i\X EFIK? JkXk\ZXg`kXc 98?I?8Q8C \c 9X_i JkXk\ F`cg`g\c`e\ GX[X`Z_ Fk_\ikfne 9 X j ` e Efik_$Jflk_ >Xjg`g\c`e\ ,'bd 0²E )/²< )0²< *'²< 8Yp\`Zffi[`eXk\j1 Xjg\ik_\8Yp\`8iY`ki`XcKi`YleXc ŸJdXcc8idjJlim\p)'(' JfliZ\1 F`c]`\c[j1@?J

8.2 International divestment European business and investment communities. Rather than influencing realities inside Sudan, Internationally, Sudan still has the status of a pariah divestment decisions by major parties like PGGM state, seriously limiting its economic options. The (January 2008) and TIAA-CREF (January 2010) are International Criminal Court has indicted President likely to reinforce reluctance in Europe and the US to Bashir for war crimes, the country is under a multi- seek business opportunities in Sudan. The US layered economic boycott from the US and is likely to sanctions keep American refineries away from remain so until the conflict in Darfur comes to an end, bidding on Sudan’s Dar Blend, which would its human rights record is appalling, and the recent otherwise increase competition and prices. The US elections have been fraudulent, possibly even more recently warned Petrochina not to take any so in the South than in the North. A US divestment Sudanese crude for its newly built refinery in South campaign that claimed to be able to influence China, which would be suited to take the Dar Blend. Sudan’s horrendous Darfur policy, further raised the In addition, the sanctions are limiting Sudan’s access reputational stakes for doing business with Sudan. to much needed advanced technologies. All this serves as a strong deterrent to US and

9. Key Issues & 9. Recommendations

9.1 Accountability established international standards and best practices, including respect for human rights and the There is not enough accountability in Sudan’s oil most relevant IFC Performance Standards and industry. Largely unscrutinized and under no legal Sustainability Guidelines, norms from the OECD’s obligation to account for its impact on nature and Anti-Bribery Convention, the Voluntary Principles on society, the industry enjoys tremendous freedom to Security and Human Rights, the Extractive Industries do what it wants. To maximize its contribution to Transparency Initiative the Global Reporting peace and sustainable development and to gain a Initiative’s G3 Guidelines, and ISO 14000 and 14001. social support basis, this accountability void needs to be filled. Only the authorities can bring that about. Combined with Government monitoring and inde - pendent auditing, this would be an effective short cut to Sudan’s laws and regulations are not adapted to the bring the industry up to international standards, raising challenges posed by the industry. The country’s its performance and building its social support basis. many environmental laws and regulations, for instance, ignore issues such as oil spills or blow outs. In addition, the authorities should rescind the pre - There are no standards for abandonment and vailing confidentiality clauses for oil contracts, rehabilitation, and the law does not provide for tendering, and social and environmental impact studies popular consultation, consent or complaint in an effort to make relevant information publicly mechanisms. Oil contracts contain no references to available. They do not serve the public interest and social, environmental or human rights standards. obstruct parliamentary scrutiny and popular con - Reporting requirements for companies are extremely sultation. limited while the Government lacks both the capacity to monitor compliance with existing rules and laws, If the national government fails to take the initiative, the and the political will to enforce them. Complaints GOSS could go it alone as the upcoming referendum has about behaviour and performance are dealt with opened a unique window of opportunity for the GOSS behind closed doors in the Ministry of Energy and to negotiate with the industry on its own new terms. Mining. Local grievances are, at best, dealt with on a case-by-case basis through local authorities. At 9.2 Accountable governance worst they are ignored. The leading companies are state owned, which further limits their need to Southern Sudan will be eligible for international publicly account for their activities. development aid for many years to come. However, The usual instruments to achieve accountability are one should not be complacent about this. The legal and contractual obligations, but getting there austerity imposed by the financial credit crisis will will take a very long time. Instead, the authorities lead to budget cuts for development assistance. could fill the accountability void by immediately Voters in Europe and the US, where most aid monies requiring the industry to respect a series of come from, have become sceptical about financial ECOS 27

support to corrupt and undemocratic governments One concern is whether the industry will tackle its that are indifferent to the poor and have no effective environmental legacies. Another is whether the list of economic policies. environmentally-friendly initiatives that the consortia have been rolling out over the past few years indeed The Government of Sudan does not have a pro-poor represent a fundamental overhaul of the industry’s economic growth strategy. And as the vast majority of performance. For instance, it is unclear whether the population in Sudan works in economic sectors GNPOC’s recently-built high-end facility for the that are disconnected from the oil industry, the treatment of produced water in Heglig is a one-off economic benefits of oil have reached a only small example of good practice or the standard that part of the population. The recent elections do not GNPOC will eventually comply with. Self-regulation bode well for democratic and transparent decision- is not a dependable alternative to government making in either the North or South. They have been regulation. It is up to Sudapet and the GOSS to set rigged in favour of official NCP and SPLM candidates. standards for production water, quality and According to oil-industry researcher Luke Patey, the discharge and ensure industry-wide compliance. SPLM is “following a trend set by their northern counterparts in accumulating resources at the centre Clearly, there are immediate costs involved in en - while neglecting the wider periphery”. In 2008, 90% suring environmental protection and local economic of salaries and 67% of development expenditures by impact, but they are minuscule compared with the the GOSS were spent in Juba. One should no longer long-term costs of neglect. The companies are take for granted that international donors will be willing expected to insist on upholding the existing contract, to fund elementary services in a country where the which contains stability clauses that protect them government is spending 45% of its budget on salaries against the costs of future government regulations. and 30% on security. Somebody has to foot the bill for protecting nature and livelihoods. An option would be for the GOSS to The expected shrinking of international donor monies consider including the costs of compliance with makes it even more important for Sudan to create an environmental standards in negotiations about attractive environment for mainstream international management fees. investors.

9.4 Legacy Issues 9.3 Environmental Standards The CPA establishes a right to compensation for Both the CPA and the Interim National Constitution people whose rights have been violated by oil require the oil industry to apply ‘best known’ practices contracts. This right arguably applies to the victims of in the oil industry, but neither NCP nor SPLM have the 1996-2003 oil wars, when tens of thousands of specified what those are. Nor did they establish people died and hundreds of thousands were brutally monitoring and enforcement mechanisms. The onus displaced in a violent struggle for control over the oil therefore falls on the companies, but they have yet to fields. The clause has not been adequately imple - publicly acknowledge their constitutional obligations. mented. A political initiative to compensate the communities for their losses would be the most Complaints about environmental damage abound in effective way to achieve justice and to reconcile all Sudan’s oil producing regions. Among the most the population with the industry. cited malpractices are large-scale hydrological disturbances, massive dumping of contaminated An independent and full inventory of environmental production water, deforestation, and farmland legacy issues will also be needed, in combination degradation. Unfortunately, there is very little with mandatory remedial processes and an scientific research to either corroborate or refute independent performance audit. Recent statements these allegations. Available satellite image analyses, by senior Chinese politicians about the country’s however, do confirm local complaints about major responsibilities in Africa suggest that the CNPC may hydrological disturbances caused by oil roads. 66 be receptive to such an arrangement.

Thanks to discrete lobbying by Sudanese environ- mentalists and interventions by the former State Minister for Oil and Mining Ms Angelina Teny, the 9.5 Social Support Basis MEM’s environmental awareness has considerably improved over the past few years. In response, the Community relations are the Achilles’ heel of Sudan’s consortia have started to develop environmental oil industry. A lack of a social support basis is a policies. In the absence of any reporting or deterrent for international investors and severely independent scrutiny, it is impossible to assess them. restricts opportunities for growth.

66. “Satellite Mapping of Land Cover and Use in relation to Oil Exploitation in Concession Block 5A in Southern Sudan 1987–2006”, Prins Engineering, June 2010; “Oil Development in northern Upper Nile, Sudan”, ECOS, 2006. Available at http://www.ecosonline.org/reports. 28 Chapter 9

Sudan’s oil industry has developed against the on oil and a healthy petroleum sector is crucial to all. background of war and many people in the South Post-referendum arrangements will be closely continue to regard the industry as an enemy. After monitored by the international financial markets. The the signing of the CPA, instances of inconsiderate economic prospects for sustained economic growth behaviour towards local communities have continued in Sudan are tremendous. The South has a fabulous to be reported. The industry is still controlled by the unexplored potential for agricultural development national Government and seems to lack affinity with and natural resource exploitation and the impressive the concerns of people in the South. Discrimination oil-driven economic growth in the North has built a in the workforce against southerners is still rife. significant human and institutional capacity that will Consortia tend to communicate with local political enable it to attract and absorb high levels of foreign authorities rather than directly with communities. direct investment. A comprehensive, straightforward Such top-down policies are known to deliver and legally sound deal that ensures continued and ineffective projects and preliminary results from responsible exploitation of Sudan’s oil wealth is ECOS research in Upper Nile State suggests that crucial for building confidence in Sudan’s economic they can also be observed in Southern Sudan. A future among the international business community. number of newly-built schools and clinics appear to be malfunctioning in the absence of staff and Comprehensiveness sustained financing. The petroleum industry is complex and the scenario following a split up of the country would require Community projects have, for a long time, been a top- unravelling and dividing an intricate web of legal, down affair, following directives from the Ministry of financial, contractual, economic and managerial Energy and Mining rather than development strategies factors. Not unlike separating Siamese twins, it and consultations with affected communities. The would be a risky and painful operation. An agreement prominent role that the CPA reserves for community that is indecisive or incomplete will lead to future consultations has remained largely ignored. The disagreement and gruelling renegotiations. prevailing policy seems to be to buy goodwill through projects. This creates community dependence on As a prerequisite for successful post-referendum favours without creating true common interests. It is a negotiations, NCP and SPLM negotiators will all need deeply flawed concept that creates a client-patron unlimited access to a full package of information relationship that is basically antagonistic rather than about oil production, calculation parameters, mutually respectful. The prevailing system sends the marketing, export and refining, as well as all relevant message that it pays to cause problems. Key data on ownership, contractual rights and functionaries at the MEM have recently publicly obligations, money flows, financial arrangements, et acknowledged the need to engage in genuine cetera. This will require establishing a data room. If dialogue about the oil industry’s current practices, not realized shortly, post-referendum negotiations will challenges and prospects. This is long overdue. To take place on an unequal footing which is tantamount build a social support basis, companies will have to guaranteeing that their outcome will be disputed. to engage with the population on the basis of equality, that is, based on the rights of each Financial arrangements stakeholder instead of a relationship built on A new agreement to share the benefits of oil may privileges and sensitivity to nuisance value. create the necessary body of common interest In Upper Nile, there are some recent examples of between NCP and SPLM to ensure peace. PDOC consulting local communities about the Continuation of the oil flows are a shared priority, but location of waste dumps and water points. However, continuation of the existing revenue sharing formula the major grievances for the local population such as cannot be explained to the population in the South discrimination in the workforce, lost farmland and and will be unacceptable to the SPLM. The history of compensation claims, still need to be dealt with distrust between the two sides counsels against satisfactorily. arrangements that would require close cooperation, i.e. shared ownership and shared management. Ownership is irrelevant if there is joint oversight and sound financial arrangements. The alternative would 9.6 Post-referendum be a fee-for-service based deal as part of a comprehensive financial scheme. challenges GOSS could agree to pay service charges to operating The decision on unity or secession will be taken by companies in accordance with a clearly defined the South Sudanese people. Whatever the outcome, formula, for example between US$ 4-6 per barrel. a new agreement for managing the oil industry is Management charges, to the extent they apply, could needed. Post-referendum arrangements must be be paid to Sudapet. Payment could be made to comprehensive, satisfy the interests of the people Khartoum on a monthly basis, in foreign currency. in Northern and Southern Sudan, and offer a Negotiations on security provisions for the operations commercially attractive framework for the future and the infrastructure could also be part of such an management of the industry. agreement. For example, Khartoum could present a budgetary plan on policing the pipeline maintenance North and South Sudan share a heavy dependency operations per year. Both SPLM and NCP agree to ECOS 29

keep downstream operations under Northern ma - Preparations for the contract review agenda are long nagement under a fees-for-service model and leave overdue. The SPLM would be well placed to take upstream management to the GOSS. the initiative by starting to highlight the issues, requesting the companies to submit relevant The financial dimension of the arrangement could information, and proposing an agenda. include standards for calculating a fixed percentage of the achieved price per barrel (calculated separately for each month) for each of the management tasks as well as of the downstream operations such as processing, refining and export handling in Port Sudan. Payment clearance could be done on a monthly basis, in foreign currency.

Southern capacity Should secession become reality, the GOSS will instantly inherit contracts and all the rights and duties they entail, without having at its disposal the necessary human resources, institutions, experience and legal capacity to monitor operations, enforce the law and protect its own rights and interests and that of its population. Nilepet, the future Southern state oil company, is equally unable to fully assume its responsibilities. If Southern Sudan becomes an independent state, this will become an acute and hugely costly affair. External consultants may be able to partially help out, but they are expensive and the GOSS would be unable to assess their work. An accelerated recruitment, training and exposure programme for future GOSS oil experts is urgently required.

Social support basis As described in paragraph 9.5, the petroleum industry lacks a proper social support basis, and consequently suffers from occasional sabotage and extortion, adding to the already high risk profile of the industry and discouraging investment.

Contract review A review of Exploration and Production Sharing Agreements is inevitable. The prevailing contracts are outdated and do not meet the terms of possible Southern secession. They are partly responsible for problems in the petroleum industry. Issues such as environmental protection, workmanship standards, compensation, labour rights, security provision, abandonment and rehabilitation, and social impact are not addressed, and where they are they are poorly addressed. These issues are also ignored in the arrangements for cost recovery. As a result, in day-to-day negotiations between a consortium and the government, both negotiating parties have an immediate financial interest in keeping costs low. If the South becomes independent, the new country will wish to see its vital interests reflected in legally enforceable obligations of the industry. As the companies are likely to object to contract renegotiation, another form of adjustment needs to be agreed upon, for instance annexes to the contracts that qualify its stabilization clauses in specific issues such as representation of Southerners in the workforce, relocation of offices to the South, environmental standards, funding of abandonment, environmental regulation and rehabilitation, and taxation. 30

Annex I: Chronology of oil development

1959 – 1983: First findings 1999 – 2004: First boost Oil exploration started in 1959 when Italy’s Agip oil In 1997, GNPOC built a 1540 km oil pipeline from the company was granted offshore concessions in the oilfields to a marine export terminal on the Red Sea. Red Sea area in the North-East. It carried out seismic On 31 August, 1999, the first 1,500 barrels of crude surveys and drilled six wells. Following Agip, other travelled through the pipeline to be loaded onto a Western oil companies -Oceanic Oil Company, Total, tanker, which sailed for refineries in the Far East. Oil Texas Eastern, Union Texas and Chevron- moved in production and export have increased steadily since to search, but to no avail and most companies then and new discoveries have been made. In 2003 relinquished their concessions. In 1974 Chevron, the CNPC announced the discovery of a ‘world class’ operator of a consortium in which Shell (Sudan) oil field in Blocks 3 and 7 east of the White Nile. In Development Company Ltd. took a 25% interest, got 2003, oil production averaged 270,000 b/d, and in permission to search for oil. In 1978 Chevron found 2004, 304,000 b/d. the first oil in the Muglad Basin which stretches deeply into Western Upper Nile in the South. In 1981 2005 – 2008: Second boost it made a second, more moderate find in the The signing of the CPA in January 2005 improved predominantly Dinka area Adar Yale in Melut Basin, conditions for oil production and export. Until 2006 east of the White Nile. Four exploratory wells showed Sudan had only one major upstream project (Blocks flow rates of 1,500 and more barrels a day. Chevron 1, 2 and 4, operated by the Greater Nile Petroleum believed there was a potential all the way south to Operating Company in the Muglad Basin), one export Malakal and east to the Ethiopian border. In 1982 pipeline (Greater Nile Oil Pipeline – GNOP), and one Chevron made a third, much larger discovery at crude oil blend (high quality Nile Blend). Late 2006, a Heglig, 70 km North of the Unity field, home of the second pipeline came on stream, a major refinery Nuer. Chevron began to develop Unity and Heglig expansion was completed, a second major upstream oilfields. In 1980, the Government granted a 118,000 project began, producing a second crude oil blend km2 concession to the Franco-Belgian Total. Unlike (low quality Dar blend), in addition to important field Chevron, Total did not get beyond seismic developments elsewhere. The country’s crude oil exploration because of security problems. This production almost doubled, making it Africa’s fifth remained so for a quarter of a century. producer with more than 434,000 b/d by late 2006. 2007 and 2008 saw a sharp increase in oil prices, and 1983 – 1998: Oil exploration commences Sudan’s oil investments boomed as a consequence; In 1984 Chevron suspended operations and removed production levels in 2007 reached 500,000 b/d. personnel, after the SPLM/A attack Chevron’s base at Rub Kona, near Bentiu, killing three expatriate workers. The Government divided the former Chevron concessions into smaller units, and in 1992 awarded the Melut Basin – Blocks 3 and 7 – to Gulf Petroleum Corporation-Sudan (GPC). In October 1996 GPC drilled and reopened Chevron’s wells and built an all weather road from Adar Yale to Melut. In March 1997, President Omar al Bashir inaugurated the site at Adar Yale. Production was only 5,000 b/d, but it was the first Sudanese crude oil to be exported. It was transported by truck to Melut, and from there by boat to Khartoum. By May 1998, production had increased to 10,000 b/d. In 1992, Arakis Energy Corporation from Canada stepped in and together with its partner State Petroleum acquired former Chevron Blocks 1, 2 and 4. Arakis made several new oil discoveries but never raised sufficient capital to finance the project. In December 1996 it sold a 75% interest in its project to state-owned oil companies from China, Malaysia and Sudan, forming a consortium called the Greater Nile Petroleum Operating Company (GNPOC).